When £6bn was wiped off insurers’ shares under threat of an FCA inquiry, the
boss of Phoenix had a bad week, but hopes are rising again

Clive Bannister was in his office in the shadow of St Paul’s Cathedral last month when a storm broke from which his closed life insurance group has still to recover.

The chief executive of Phoenix Group Holdings was as stunned as everyone else when Clive Adamson, the director of supervision at the Financial Conduct Authority (FCA), said in an interview with the Telegraph that the regulator was to review 30m closed life insurance policies going back decades and potentially scrap exit fees on such policies.

“We had had a busy week,” says Bannister ruefully. “I’d had board meetings on the Monday and Tuesday, announced very strong results on the Wednesday, saw investors on the Thursday and was about to go into a meeting with our asset management business when I heard the news.

“I thought: 'Gosh this might not be a normal day’. I had said to my wife that I would leave the office at 3pm and she had raised her eyebrows and said she would believe that when she saw it.

“I’m afraid my street credibility for coming home is not that good and I didn’t get home that night until relatively late. It was a remarkable day and hopefully not to be repeated.”

He went to watch classic car racing at Goodwood the following weekend and was out of mobile reception. “I was blissfully looking at carburettors,” he says.

George Osborne waded into the controversy the following Tuesday, when he said in a letter to the FCA chairman, John Griffith-Jones, that he was “profoundly concerned” about the comments and that the FCA should consider disciplinary action against staff. He set out several questions the Treasury wanted answered, including to what extent a “false or disorderly market” existed.

The FCA appointed lawyers Clifford Chance to lead an inquiry into the events. The FCA chief executive Martin Wheatley has faced calls to resign.

So what does Bannister think happened? “We have to look at George Osborne’s letter and await its outcome with great interest,” he says. “I don’t know and that can hardly be surprising if the Treasury doesn’t know either.”

Should Wheatley quit? “I don’t think this is ad hominem,” says Bannister. “I think this is about a regulator and its relationship with the industry. Nobody profits if it is adversarial.

“We need fact-based decision-making, which is why George Osborne’s letter will doubtless be fully answered. This shouldn’t be about individuals. It’s much more about how a regulator works with an industry and the rules that apply to us should apply to them.”

That last point is what the fuss is all about, as the FCA stands accused of effectively moving markets with false information – something it does not tolerate from the financial firms it regulates.

“This is not an adversarial competition,” repeats Bannister. “That’s not the way to operate an industry, because we want to attract capital to protect people’s retirement and capital is attracted where there is stability and predictability of returns. Anything that diminishes that doesn’t help a regulator and doesn’t help us as operators. I think it was a bit of a self-inflicted wound.”

Bannister says he is reassured by the FCA’s clarification that the extent of its proposed review of the closed life industry will be less wide-ranging.

“It’s not going to retrospectively apply current standards. It’s assessing whether there’s an issue that needs to be addressed or requires action. It’s not going to go back on historic advice,” he says.

“It will look at the degree of cross-subsidisation between open and closed life businesses, but we only run a closed business so that particular bullet will pass us by, if it is indeed a bullet.

“It will also look at whether the charges are appropriate and the indications are that if you’ve adhered to what was entered into contacts then they’re not going to be changed retrospectively.

“So I think this was probably more about process than content.”

Bannister is most keen to separate what he calls the “noise” of this controversy from the underlying health of Britain’s life insurance sector and of Phoenix.

“All this does not diminish the need to have a closed life sector and an industry champion and neither does it diminish the underlying economics, which are extremely good.

“You want more capital in this industry, not less, and we at Phoenix are in better capital shape than we’ve ever been,” he says. “This is an industry that the UK is extremely good at and therefore it should be supported. It’s a good advert for UK plc and the closed life sector is really needed as a specialist part of this industry.”

An irritating part of the timing of this imbroglio must be that it has come just as Phoenix looks to have got its house in order.

Formed by a merger of the closed life fund consolidators set up by former pizza king Hugh Osmond and Resolution Life founder Clive Cowdery, Phoenix was saddled with debt just before the 2008 financial crisis.

Bannister is careful to avoid attributing blame. “This is a business whose very stable and long term cash flows attract a capital structure of which debt okays a part,” he reflects. “The enthusiasm of the merger of Pearl and Resolution in 2008 reflected the appetites and attitude of that time.

“Hindsight is a wonderful thing, but what’s remarkable is the enormous stability. We’re in a completely different place now than we were a few years ago.”

Indeed, when Phoenix’s just-announced deal to sell its asset management arm Ignis to Standard Life for £390m is completed, it will have paid off £1bn of debt in just over a calendar year.

Last year Phoenix repaid £700m of debt. Its gearing was 58pc then, but it is set to fall to 39pc after the Ignis sale - just inside the 35pc-40pc range that Bannister feels will secure the company an investment grade credit rating and enable it to supplement its current bank debt with bonds.

“Our gross enterprise value is £5bn and our market- consistent embedded value having completed the Ignis transaction will be £2.6bn,” he says. “The gap between the two is our debt.

“That will make us a more compelling counterparty. If you are thinking of selling your closed life book, you want to have a counterparty that’s rock solid so this accelerates us down our stated ambition of being the UK’s leading consolidator of closed life businesses. “Our cashflow last year was £817m and our operating profits were £439m. There’s only one quoted closed life company of our size in the UK.

“We have a duty of care to 6m policyholders. Society on the whole has a real challenge in making sure that money lasts as long as people live, so having an extremely successful industry that attracts capital and serves policyholders so that people have happy outcomes through retirement is a matter of great importance.”

Phoenix is also set up to be a consolidator and Bannister says there is £200bn of closed UK life funds business to potentially go for.

He believes the Government’s review of the annuities market may encourage some owners of such funds to sell and expects to be involved in conversations, though he thinks acquisitions of books of business are more likely than big corporate purchases.

One obvious deal is a merger with Admin Re, the closed life funds business of reinsurer Swiss Re, but negotiations last year were unsuccessful.

Might that still happen? “Look’” says Bannister. “There was an industrial logic and we hold the Swiss in high regard. But there are clearly more fish in the sea. You don’t marry the first girl you kiss.”

There are plenty of other changes going on, though Bannister says Phoenix will not be unduly affected by the Annuities Review as £880m of the annuities that it sold last year contained policyholder guarantees.

The potential loss of the remainder would reduce Phoenix’s operating profits by around 3pc. “For other people, it’s a much larger chunk of their book,” says Bannister. “That’s going to change the industry.”

Phoenix is also not greatly affected by the pensions changes in the Budget, Bannister says. The son of famous four-minute miler Sir Roger Bannister, he has run Phoenix since 2011, joining after 17 years at HSBC.

He runs a little but says his main passion is chairing the Museum of London. “You wander around and you see the plague, the black death and the fire of London.”